Below is an update of a chart that I first ran last year around this time. It’s the multiple of the S&P 500 using “peak” earnings (the highest level of earnings recorded to that date). Using peak earnings solves some problems inherent with other types of earnings multiples.

“Forward” earnings multiples use analyst estimates of future earnings. The problem with using these earnings is that analysts serially overstate future earnings growth and will tend to revise it lower over time. There is also limited data for forward earnings estimates, which makes historical comparability difficult.

In contrast “trailing” earnings multiples use earnings that have already been reported. The good thing about trailing earnings is that there isn’t any analyst bias embedded, but the problem with using this type of multiple is that in recessions, earnings can fall significantly more than prices, which makes stocks look more expensive than they actually are.

Using peak earnings eliminates these problems because prices are only measured relative to a milestone which has certainly been achieved rather than may be achieved at some point, and because that milestone is held at its highest level, the cyclicality of earnings is adjusted away.

Looking at price to peak earnings, the S&P 500 is currently quite expensive relative to historical comparison. At 19.9x peak earnings, the current multiple exceeds levels from which the index crashed in 1987 and is just a touch below the 1929 high of 20.2x earnings. This multiple is still well below the height of the dot com bubble though, when the S&P’s price to peak earnings multiple reached 32.9x.

On average since 1900 the S&P’s price to peak earnings multiple has been 12.4x. In the last 50 years, it has averaged 15.5x. If the S&P 500 traded at its average multiple since 1965, then it would be at 1644, which would represent a 22% decline from today’s levels.